Sam Hummel is considering opening a Kwik Oil Change Center. He estimates that th

Question

Sam Hummel is considering opening a Kwik Oil Change Center. He estimates that the following costs will be incurred during his first year of operations: Rent S6,000, Depreciation on equipment S7,000, Wages S25,200, Motor oil S2.00 per quart. He estimates that each oil change will require 5 quarts of oil. Oil filters will cost S3.00 each. Hemust also pay The Kwik Corporation a franchise fee of S1.20 per oil change since he will operate the business as a franchise. In addition, utility costs are expected to behave in relation to the number of oil changes as follows umber of Oil Changes tility Costs 5,000 7,300 S96400 S12,600 17,000 12,000 19,000 Mr. Hummel anticipates that he can provide the oil change service with a filter at S25 each. Instructions (a) Using the high-low method for utility costs, determine the variable and fixed costs for utilities Determine the break-even point in number of oil changes and sales dollars (c) Without regard to your answers in parts (a), (b) and (c), determine the oil changes required to eam net income of S20,000, assuming fixed costs are S38,000 and the contribution margin per unit is S8

Explanation / Answer

1a) Variable cost (b) for utilities using the high-low method can be found using the following method:

b=(y2-y1)/(x2-x1)

Where y2= total cost at highest level of activity

             y1= total cost at lowest level of activity

             x2=number of units at the highest level of activity

             x1=number of units at the lowest level of activity

=(17000-5000)/(19000-4000)

=12000/15000

                                                                                            =$ 0.80

Total fixed is calculated by subtracting total variable cost from total cost:

=y2-bx2

=17000-0.80×15200

=17000-15200

                                                                                          =$ 1800

Therefore, variable cost for utilities is $ 0.80 per unit while fixed cost is $ 1800.

1b) First lets segregate all the variable and fixed cost from given information:

Variable Cost

Motor Oil (2*5)

10

Oil Filter

3

Franchise Fee

1.2

Utilitiy Costs

0.8

Sum

15

   

Fixed Cost

Rent

6000

Depriciation

7000

Wages

25200

Utility Cost

1800

Sum

40000

  

    

  

The break even point is the point of 0 profit or loss. The formula to find break even point is:

px=vx+FC…..(1)

            where x= number of units produced

            p=price per unit

            v=Variable Cost

            FC=Fixed Cost

We are also provided that the selling price per unit is $ 25. We need to find the optimal quantity (x) to breakeven. So rearranging equation 1 in terms of x we get:

x=FC/(p-v)

=40,000/(25-15)

=40,000/10

=4000 oil changes

In terms of dollar revenue at the breakeven point:

=p × x

=4000×25

=$ 100,000

1c) The formula to find the quantity required to earn a specific net income given fixed cost is:

Net Income +Fixed Cost/ Contribution Margin Per Unit

=20,000+38000/8

=58000/8

=7250 oil changes

Variable Cost

Motor Oil (2*5)

10

Oil Filter

3

Franchise Fee

1.2

Utilitiy Costs

0.8

Sum

15

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.